As the Manager of We Do It Right Construction,you Need

question 35

Essay

As the manager of We Do It Right Construction,you need to make a decision on how many homes to build in a new residential area.There is a 20 percent chance of a recession,a 60 percent chance the economy will remain as it is,and a 20 percent chance there will be an economic upturn.If a recession hits,your inverse demand curve for new homes will be P = 100,000 - 4Q.If things remain as they are,your inverse demand curve will be P = 115,000 - 3Q.If economic growth occurs,your inverse demand curve will be P = 130,000 - 2Q.Your cost function in all three scenarios is C(Q)= 70,000 + 2Q + 0.5Q².If you are risk neutral,how many homes will you start?

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Definitions:

Compounded Semi-annually

Interest that is compounded and added to the principal twice per year, emphasizing the process of growth due to reinvestment of interest.

Issue Price

The price at which a new issue of securities is offered to the public.

Strip Bond

A bond where both the principal and regular interest payments have been removed, typically sold at a discount and pays no interest until maturity.

Yield Rate

The income return on an investment, such as the interest or dividends received, expressed annually as a percentage based on the investment's cost, current market value, or face value.